AVIACENTER NEWS

In the interview to Transport of Russia, Anton Koren, the CEO of the Center for Strategic Development in Civil Aviation (AVIACENTER), talked about the main trends of the development of Russian civil aviation, made forecasts of the industry development and analyzed the factors for its further strong growth, as well as the need for improving the regulatory framework.

– Mr. Koren, in 4Q 2016 there has been a visible positive trend in the development of Russian air travel market. Does it mean a new development stage?

– In December 2016 the growth rates of the passenger traffic and passenger turnover of Russian airlines were 20.3% and 21.9% correspondingly. Such moments are very rare in the history of the industry development.  This really is a turning point in the development.

This being said, at 2016 year-end the number of passengers, transported by Russian airlines, decreased by 3.8% compared to 2015 and reached 88.6 mln passengers. The number of passenger-kilometers was reduced by 5.1%, to 215,3 billion passenger-kilometers.

– What caused such a change?

– The reduction in the workscope is primarily caused by wide-scale reduction in international travel during the first three quarters, which decreased almost by 15% over the first nine months of 2016, compared to the same period of 2015 with stagnation of domestic traffic as such.

The main reasons of traffic volume reduction is the closure of high-capacity market segments (Egypt, Turkey, Ukraine), caused by the necessity of providing flight safety and political factors, and the October 2015 exit from the market by such a serious player as Transaero.

At the same time, thanks to the stabilization of Russian economic environment and rebound of the business activity, there has been a trend reversal in the industry development by the beginning of the fourth quarter.

– What are the prospects of civil aviation development in 2017 and in the mid-term?

– The encouraging results of the 4Q 2016, as well as economic growth, predicted for 2017, give ground for predictions of moderate 5-6% growth of air travel in 2017, and at the same time, for positive assessment of mid-term market development.

– What structural changes has the air travel market seen last year?

– In 2016 the air travel market continued to be redivided between the main players because a significant market share, previously belonging to Transaero, was released. By AVIACENTER estimations, the final reallocation of the market and available niches must be complete in 1Q 2017.

In 12 months of 2016 five largest airlines have transported 59.7 mln passengers, which is 19.3% more than over the same period last year.  This is 67.4% of all the passengers, transported by Russian airlines over the last year. The market concentration increased by 8.8% in a year.

The growth rates of large federal companies performance indicators have exceeded the growth rates of regional air carriers. The largest market player - the Aeroflot group - continues to corner the market well ahead of the other players.

Russian players also feel the growing competitive pressure of the international airlines who started to restore their offers on the Russian travel market.

– What new trends are shaping the look of the industry today?

– First of all, the airline business-models have changed. Competitive behavior strategies are changing significantly.

Traditional airline products continue to resemble low-cost airline products on the air travel market.  The emerging global trend of shifting the traditional airline product towards the hybrid model with low-cost elements has strengthened.

Business elements, previously characteristic of low-cost air carriers, can now be found in traditional airlines.

There is a new trend of building new airlines on the business-model of a hybrid carrier with a minimal service range.  In particular, competitive strategies of hybrid models are implemented in the strategies and business plans, developed by AVIACENTER for airline start-ups in Russia and the CIS, including the segment of short-haul and regional air travel.

Over the next years we should expect the outspread and development of base airports for serving low-cost air travel. AVIACENTER has developed such business projects for creating low-cost airports. A business-model of an alternative low-cost airport in the region is feasible, especially in large agglomerations with strong base carriers in the main airports.

– What is happening in the air travel market competitive environment, besides growing market concentration? What new technologies are implemented?

– Worth noting is the uberization of the industry. With an emerging role of metasearch engines in selling travel services, the price factor prevails for consumers selecting an airline.

Airlines do not control sales channels fully, with high competition, the metasearch engines dictate the terms of product formation.

The expansion of the uber-model leads to regional airline brand blurring. In general, if this is not a premium brand, the passengers want to travel on time and at a lower price, and the additional services are irrelevant, especially on medium and short distances.

This being so, even for large premium players the scale economy effect becomes less important, the airlines are forced to develop more complicated competitive strategies, considering the particularities of each specific route.

– What will happen to the domestic and inbound tourism? What are the prospects of regional travel?

– On the domestic travel market in 2014-2015 the high performance growth rates were fueled by such factors as dramatic reduction of effective demand for tourist products, sold in foreign currencies, and relative price advantage of tourist products inside Russia. In 2016 the situation changed: until the third quarter domestic air travel stagnated.

Now, with lower exchange rates of the dollar and Euro, with growing domestic interregional and international air traffic, the factor of airline economic growth has begun to dominate. Many regional airlines, including the newly created ones, are building and will continue to build their strategies on the basis of subsidized business models. 

– How is the country's airport network developing?

– In 2016 the airport network in Russia included 259 airports and about 1400 landing grounds. Let us remember that in 1991 the Russian airport network comprised of 1450 aerodromes. The number of airports in the national network continues to decrease.

The main reason for this is the lack of financing sources. Dramatic measures are required to determine additional financing sources for modernization of aerodrome infrastructure. Besides, a new concept of the national aerodrome network development is necessary. The previous development model was primarily built on the federal financing, but considering the consistent budget deficit we need new approaches.

– What real measure can provide the development of the aerodrome network in Russia?

– From AVIACENTER's perspective, the most rational tool to provide the development of the national aerodrome network on a full scale is the creation and implementation in Russia a fund to accumulate the resources for aerodrome development financing.

Note that the fund does not need to include fees paid by air passengers or airlines, or be limited to such fees, there are other sources.

– How can this fund be implemented? And what amounts of financing can it cover?

– This tool can be implemented step by step in segments with low elasticity of price-dependent demand, which will have almost no impact on the composite air travel quantity demanded. For example, this is the international air travel segment, international passengers. It's also other industry players, such as refueling companies and cargo operators, whose operations are characterized by stable financial turnover and stable monopolistic market situation.

Such system started to be created by the Working Group of the Federation Council for preparing suggestions for regional aviation development, in which AVIACENTER and the industry community play an active role.

 – How do you evaluate the situation in Russian aviation industry? Is there sufficient government support? What projects are implemented and do they have a future?

– Russia has been famous for quality aircraft, and in the recent years our country is returning as a strong aviation power.

In the civil aircraft engineering segment, we have seen a range of successful projects for new long-haul and regional aircraft, modern multipurpose helicopters, able to meet international competition.

It is most important to mention the successful Sukhoi Superjet 100 project, marking the revival of Russian civil aircraft engineering. The decisions taken as part of the GTLK Sukhoi Superjet 100 operating lease project, according to orders of the Russian Government, made it possible to launch the mechanism of supplying aircraft to the fleet of Russian airlines at a competitive lease rate.

As a participant of this development, AVIACENTER confirms the effectiveness of the measures taken and considers feasible and rational to continue the implementation of the specified project regarding Superjet and to extend these mechanisms to other modern aircraft manufactured in Russia, particularly to Il-114 and MC-21.

The decisions taken to support the lease of Russian Helicopters group products through a similar scheme, are also an effective novation in the development of civil aviation.